Reforming DOE’s Loan Guarantee Program

With the 10th anniversary of the 2005 Energy Policy Act (EPACT) approaching, the Bipartisan Policy Center (BPC) is producing a series of briefs examining policies put in place in 2005 and whether more must be done as Congress examines passage of an energy bill in 2015. The first in this series examines the loan guarantee title.

No other provision of the 2005 Energy Policy Act has come under as much criticism as Title XVII, “Incentives for Innovative Technologies”—otherwise known as the Department of Energy (DOE) loan guarantee program.

Congress established this program with significant bipartisan support. The concept of the program as passed in EPACT 2005 is straightforward: the Secretary of Energy may make loan guarantees for up to 80 percent of the cost of advanced energy projects, including fossil fuel, renewable, nuclear and energy efficiency technologies. Projects have to both reduce man-made greenhouse gas emissions and employ new or significantly-improved technologies. The estimated federal cost of any loan guarantee (credit subsidy cost) must be covered in advance by the borrower, or through specific appropriations.

Then-Senate Energy Committee Chairman Senator Pete Domenici (R-NM) championed the idea, and he crafted the language to address concerns raised by previous experience with federal loan guarantee programs. During the late 1970s and early 1980s, in the aftermath of the oil embargo crisis, several large projects received loan guarantees to create synthetic fuels from domestic coal and oil shale. Some major defaults resulted, including the Great Plains Coal Gasification Plant in North Dakota—though that project was actually a technological success and is still operating.

Those early loan guarantees were often used in combination with price guarantees, providing an especially strong incentive for private-sector participation, although also potentially increasing costs to the taxpayer. Sen. Domenici designed his version of a loan guarantee program to operate without price guarantees and with “skin in the game” from project developers. The loan guarantees originally authorized by Title XVII were designed primarily for technologies just at the edge of economic and commercial viability, limiting risk to the taxpayer.

Unfortunately today, when policymakers hear “loan guarantee” they often think “Solyndra,” the solar company that—under a temporary program authorized by the 2009 American Recovery and Reinvestment Act (ARRA)—received both a loan guarantee and an appropriation for what would otherwise have been its share of the risk, and went bankrupt shortly after. Under the temporary ARRA loan guarantee program, which expired in September 2011, Congress appropriated $6 billion to cover the DOE’s credit subsidy cost and removed this cost from applicants’ responsibility. The failure of Solyndra, as well as two other projects under the ARRA program, has brought DOE loan guarantee program under intense scrutiny. While the ARRA loan guarantee program has expired, DOE still has authority to issue loan guarantees under the original EPACT 2005 program. It is worth noting that the majority of loan guarantee recipients have not defaulted or imposed costs on the U.S. Treasury.

The intellectual underpinnings of the original program as a means to reduce barriers to investment in innovation remain valid today, but there is a need for additional reform of the DOE program. Recognizing this need, the current chairman of the Senate Energy Committee, Sen. Lisa Murkowski (R-AK), introduced the Energy Loan Program Improvement Act (S. 1223). This bill seeks to restore Sen. Domenici’s original intent for the program, by ensuring taxpayers are protected, project developers stand behind their projects, and the DOE acts as a good partner with those project developers.

A commonsense improvement to the loan guarantee program can be accomplished in a manner that continues to promote much needed energy innovation in this country. Improving the loan guarantee is an issue ripe for congressional bipartisan reform and BPC applauds Congress for examining this issue.